Getting what they deserve? Have executives behind the recent spate of financial frauds received fair treatment? Several experts weigh in on the U.S. government's response thus far to corporate malfeasance

Internal Auditor, Oct, 2003 by Russell A. Jackson

THE DUST IS JUST BEGINNING TO settle in the series of U.S. corporate scandals that made "accounting fraud" a household phrase. Many of the affected corporations will never be the same, and some have already sought bankruptcy protection. Executives at several of these firms steadfastly maintain their innocence and will eventually stand trial. But some of their colleagues have begun to plead guilty to civil and criminal charges by the U.S. Securities and Exchange Commission (SEC) and U.S Department of Justice--and some have already agreed to settle, for dollar amounts well into seven figures.

So far, analysts agree that federal officials are proceeding in a manner that's perhaps more aggressive than usual, but that hasn't yet crossed the line into unfair, illegal--or, worse--counterproductive. Experts say that the SEC and the Justice Department have flexed their prosecutorial muscle more than in the past, but they also agree that the executives in the cases seem to be receiving fair treatment.

Clifford Hyatt is an attorney in the Los Angeles office of law firm Chadbourne & Parke, which represents defendants in SEC cases--including two or three of the most prominent names in the recent scandals. Despite the multiple digits in some of the settlement figures, Hyatt says it's too early to tell how the prosecution will play out. "In terms of the net that's being cast," he comments, "it's very, very broad now. Federal regulators, the SEC, the National Association of Securities Dealers, the New York Stock Exchange, and the U.S. Attorneys Offices are being extremely aggressive in terms of who they're investigating." And although he asserts that law enforcement officials around the country are pushing the envelope, he concedes that "this is a brave new world in securities law, and it's hard to say if prosecutors are walking the line in terms of making sure justice is being served."

Charles Elson, Woolard Professor of Corporate Governance at the University of Delaware's Weinberg Center for Corporate Governance, says the SEC is acting appropriately. "Certainly, it's much more aggressive than it was 10 years ago," he says. But he also notes that the muscle flexing is in response to the unique circumstances of the last two years. "The penalties they're seeking are appropriate, and the aggressiveness with which they're seeking them is in line," he adds.

Although Elson and Hyatt agree that there can be unintended consequences if regulators go too far too fast--the attorney warns of internal auditors afraid to do their jobs and a dearth of executives willing to certify their companies' financials--Elson stresses that the increased aggressiveness is, so far, a good thing. "It's a deterrent," he says. "There's always a risk when you step up enforcement that you'll create a downside. But given what happened, a cloud over the industry is not such a bad thing. It puts people on a heightened degree of sensitivity and awareness of the potential problems and keeps people who may veer into gray areas much closer to the straight and narrow."

Cases that have been resolved to date certainly suggest a concerted effort to publicly ensure that justice is served--combined with the SEC's traditional preference for stopping illegal activity without disrupting the normal course of business any more than necessary. Opinions vary, however, as to whether regulatory response to the corporate misdeeds has been too harsh or too limited, and whether or not those involved in the alleged scandals are getting what they deserve.

BALANCING MANY VIEWS

Chris Plath, an associate director of the Conference Board Inc.'s New York-based Global Corporate Governance Research Center, says that, to date, the SEC has been measured in its response to the corporate frauds, but with good reason. "One of the main issues here is that although many of the actions may have been highly unethical, they weren't technically illegal," he explains. "That's why a lot of the corporate activity in response to the alleged misdeeds has been remedial rather than punitive."

From the public's perspective, things look very different, Plath notes. "If you lost your 401k or your investment," he explains, "you are more likely to believe that the wrongdoers aren't getting what they deserve and that there's a special place in hell waiting for them. And shareholders get hit twice, because companies pick up the bill for any penalties incurred by management and for higher directors and officers (D&O) liability premiums. Directors and officers feel minimal, if any, impact because they're protected by the insurance and any indemnity provisions available to them."

On the other hand, Plath points out that many people on the corporate side believe the sentences and penalties issued thus far are somewhat harsh. And he says many top companies, as well as their D&O insurance providers, feel like they're serving as a "virtual ATM" for the trial lawyers. "There is certainly an element of the federal government making examples of the 'bad actors," he says. "The cases are so high profile and widely published in the media that federal officials are eager to show they're doing something. That also helps restore public trust in the markets, which benefits everyone."